Who Is Credible? Government Popularity and the Catalytic Effect of IMF Lending

• Author: Sujeong Shim
• DOI: http://doi.org/10.1177/00104140211060280
• Published date: 01 November 2022
• Date: 01 November 2022
• Subject Matter: Articles

Article

Comparative Political Studies

2022, Vol. 55(13) 2147–2177

© The Author(s) 2022

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DOI: 10.1177/00104140211060280

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Who Is Credible?

Government Popularity

and the Catalytic Effect

of IMF Lending

Sujeong Shim

1



Abstract

In this paper, I explain variations in international investors’reactions to In-

ternational Monetary Fund (IMF) programs. Investors react favorably if a

borrowing government is credibly committed to implementing essential IMF

conditionality. Instead of engaging complex information processing about

economic reform, however, investors rely on a heuristic device to assess the

borrower’s domestic political conditions. I argue that a borrowing govern-

ment’s popularity is an important cue for investors to assess the prospect of

an IMF program. Investors associate higher government popularity with

better implementation of the program and react more favorably to more

popular borrowers. Using annual data from up to 52 emerging market

economies from 1998 to 2017, I f‌ind robust statistical evidence supporting

these claims: an IMF program alone does not restore investor conf‌idence.

Rather, an IMF program carried out by a strong government does. My f‌indings

have important implications for the study of global f‌inancial governance and

credible commitment.

Keywords

iInternational Monetary Fund, public opinion, government popularity,

international f‌inancial market, political economy

1

University of Zurich, Zurich, Switzerland

Corresponding Author:

Sujeong Shim, Department of Political Science, University of Zurich, Affolternstrasse 56, Zurich

8057, Switzerland.

Email: shim@ipz.uzh.ch

When does an International Monetary Fund (IMF) program work? In May

2010, the Greek government agreed to implementextensive austerity measures

and structuralreforms in exchange for a 3-year, €110 billionloan from the IMF,

the European Commission, and the European Central Bank. Combining the

largestloan in the IMF’s history with an “ambitious”policy package,the bailout

program was supposed to “restore market conf‌idence”(IMF, 2010). The

outcome was, however, disappointing. Throughout the 22 months of the

program duration, investors became increasingly reluctant to lend to Greece.

They asked the Greekgovernment for an interest rate of 7% at thebeginning of

the program, and it spiked to a whopping 29% in February 2012 when the

program was eventually canceled and replaced with a new program.

Why did the Greek bailout program fail to restore investor conf‌idence

despite the unprecedentedly large loan, coordinated support from the IMF and

the European Union, and the government’s overt commitment to extensive

economic reforms? To use an IMF term, the Greek program failed to trigger

“catalytic effects”: it did not catalyze private f‌inancing. When private f‌i-

nancing does not follow an IMF program, a borrower economy falls into a

lengthened economic crisis, as was the case for Greece. Under what con-

ditions can an IMF-participating government successfully attract international

private f‌inancing?

A substantial body of literature explores this question, with many studies

focusing on political and economic structural factors such as a borrower’s

macroeconomic fundamentals and political institutions. However, because

structural factors tend to remain constant over a short period of time, they provide

limited explanations for within-country variations, including the exacerbated

investor reaction for Greece during 2010–2012. In this paper, I suggest that

explaining investors’reaction requires much more than an examination of a

borrower’s macroeconomic or political institutions. International investors reward

borrowing governments that are credibly committed to implementing IMF

conditionality. Investor reaction therefore depends on the domestic politics within

which the government carries out the IMF-mandated reform.

Instead of processing all the information associated with complex austerity

measures and economic reforms, however, investors rely on simple cues

readily available for them. Specif‌ically, I argue that a borrower’s political

popularity plays a critical role in shaping investors’perceptions about the

credibility of IMF participants. Investors expect governments with lower

levels of public support to have greater diff‌iculty fully implementing IMF

conditionality. Consequently, investors react favorably if a borrowing gov-

ernment gains public support.

My theoretical framework suggests that the terms of IMF programs as well

as investors’reaction could depend on a borrower’s popularity. IMF off‌icials,

for example, can grant more lenient programs to more popular borrowers

because they appear more credible and thus more likely to make a program a

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